Yield of Dreams

October: More Evidence Investors Buy High, Sell Low

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BuyHigh_SellLowPerhaps retail investors are not wising up to the equity markets as much as we thought they were in August... According to Morningstar data released today, retail investors redeemed $18.2 billion from U.S. stock mutual funds in October, the largest outflow for the asset class since July, when equity mutual funds bled $22.7 billion.

Yes, it's true we've had a choppy couple of months in the equity markets. BUT THE S&P 500 WAS UP A WHOPPING 10.9 percent in October, the best one-month stock rally since 1974!!! Meanwhile, the S&P was down 7 percent in September, but equity funds only lost $6.9 billion during the month. Retail investors notoriously buy high and sell low. According to Morningstar, some of October's outflows were likely investors reacting to September's loss, but some of its was also seasonality:

U.S.-stock flows continue to show a certain degree of seasonality, too. During the past five calendar years, outflows have picked up in the second half of the year. Much of this can be explained by annual year-end tax selling and the reinvestment that is typically made at the start of each year. Plus, in years such as 2007 and 2008, that's when the bad stuff happened. However, that wasn't the case in 2010, which saw a surge of outflows after the flash crash in May.

I won't dispute the fact that it's hard to time the market. Academics say it's a fool's game. But still, investors are struggling to maintain their income and are complaining that there is nowhere to achieve returns, yet many just missed out on one of the best performing months for the stock market in years? Might it be time to put a little risk on the table? Robert Arnott, founder and chairman of Research Affiliates, said that to succeed at investing, you've got to be greedy when others are terrified and terrified when others are greedy. In other words, look for those contrarian signals.

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Casting a gimlet-eye on asset management issues.

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